The Day Ahead: Awash in Irrational Exuberance

Emotionally connecting with the market is a rewarding activity, when all is said and done -- and you, too, can achieve this state! In service of this, I have put together a series of market events this week that you should have spotted -- but probably didn't. Not only is this helpful guidance, but it sheds light on why I continue to be disengaged with the market. I'm leaving calls open to run into earnings reports -- including a reiterated buy on eBay (EBAY) earlier this month -- even though there's time for the next disaster story to present amid signs of irrational exuberance in the market.

Where Irrational Exuberance Is Apparent

Three leading indicators -- the ARCA Airline Index, the Dow Jones Transportation Average and the Baltic Dry Index -- have jumped on market expectations for a smooth re-acceleration in second-half growth. It seems people fear they are at risk of missing the boat, and they are likely doing minimal research here. If they were, they would see that valuations such names as Ryder (R), CH Robinson (CHRW) and UPS (UPS) are bordering on irrationally stretched, given a rational "base case" second-half growth scenario.

1. In the impending face of fiscal drag, product prices can only be pushed so far before the consumer either seeks cheaper alternatives or waits on the sidelines.

2. Also ahead of fiscal drag, increased promotions on premium products or experiences may not be enough to drive transactions.

3. In the full face of fiscal drag, if a company is working off a base of large prior-year sales and margin expansion, its stock could be pummeled by the irrationally exuberant Street.

Meanwhile, I couldn't help but to feel disappointment in JPMorgan Chase's (JPM) housing-related businesses vs. the prior quarter. That sixth sense was heightened when I thought about the sequentially slowing new-order growth at Lennar (LEN), as well as Wednesday's limp close in SPDR S&P Homebuilders (XHB). Pardon me if these are a couple flashing yellow lights on the majestic-housing recovery that had been prescribed for 2013.

CPI Analysis, Made Easy

Do me a favor and ignore this statement: "A tame consumer price index allows the Fed to stay ultra-accommodative." Newsflash, partner -- the market realizes the Fed is not changing its tune anytime soon, but it certainly doesn't have confidence in corporate revenue. As we all learned in college, a key component of revenue is price! The CPI, in my bunker of realism, signaled an ineffective Fed and downside risks to 2013 growth estimates -- factors that aren't presently reflected in share valuations.

Remember, none of what I am discussing may come to fruition, but it could indeed be factored into today's valuations if these tells pile higher.

What is the Essence of the Philly Fed?

Ask yourself this today as the Philadelphia Federal Reserve Index crosses the wires: If a number rebounds in this type of economy, is it sustainable? There's too much optimism on the December Philly Fed, in my opinion.

Even BorgWarner (BWA) told a tale that its earnings growth rate would moderate in 2013 year over year -- a function of mediocre revenue expansion. (There is a limit to margin expansion via restructuring actions; revenue will have to reignite eventually.)